There are many factors that go into how you pay independent contractors, and the way you pay impacts your relationship greatly. It varies from paying contractors on time, in their local currency, and through their preferred payment method.
The problem is that unless you have the infrastructure, processes, and tools required to pay independent contractors promptly, you’ll learn it is not that easy. With time you’ll probably also learn the hard way that most freelancers won’t be willing to stick around.
In this guide, we’ll cover everything you need to know about how to pay independent contractors so you can improve retention and engagement.
This is part of an extensive series of guides about workforce management.
Why it’s crucial to pay contractors on time
Modern businesses must rely on freelance talent if they want to achieve the levels of speed, agility, and expertise required to thrive in today’s competitive business landscape. However, companies risk souring freelancer relationships or losing them completely if they are unable to pay them based on the payment terms agreed upon.
According to research published by PYMNTS.com, 40% of gig workers said that faster payment is reason enough to choose to work with one company over another.
For many contractors, getting paid on time is a routine struggle.
- 29% of freelancers said they were paid late.
- One-third of freelancers said that they worked with a company that did not pay them at all for their work. 40% of this group said that the company that failed to pay them simply “ghosted” them without addressing the issue
If you want the talent you spent so long searching for, vetting, and ramping up to stick around, paying them on time is crucial (not to mention, the moral thing to do!).
How should we pay independent contractors?
Good question. There are many payment methods you can use. The best way to choose is to ask the contractor which method they prefer, then see if your company can accommodate it.
Here’s a breakdown of the main freelancer payment methods.
1. Bank transfers
- ACH payments:Also known as “direct deposits,” ACH payments are transferred directly into the freelancer’s bank account. This payment option is only relevant for companies and contractors within the same country, as you must have a domestic bank account.
- Wire transfers:This may be a good option for issuing payments to freelancers in different countries, but it could cost both parties more. Most banks apply fees to both recipients and senders.
- Check: Paper checks are the cheapest option for paying freelancers and contractors, but they are difficult to monitor, slow, less secure than other options. Freelancers rarely opt for them.
- eCheck: An eCheck is the digital version of a paper check. It uses ACH to direct funds from your company’s account into the freelancer or contractor’s account through a payment processor. eChecks are a great freelancer payment method because they are fast, have low processing costs, and they are secure. Processing fees can be as low as $0.10 per transaction, and freelancers can receive eCheck payments on the same day they are sent.
- Credit card: In order to pay a contractor with a credit card, they must already have a merchant account open with your bank, or use a compatible third-party merchant service, such as Square. Most independent contractors and freelancers are not set up to accept credit card payments, so this option is seldomly used. Contractors may also be responsible for fees of up to 3% of the payment total. However, payments are immediate and secure.
2. Payment systems
- PayPal: PayPal is the world’s largest online payment system. It’s a popular choice for paying freelancers because it issues payments fast, it handles currency conversions, and it’s secure. However, contractors must have an active PayPal account in order to receive funds through the platform, and rates vary significantly.
- Bill.com: Bill.com is a platform that uses AI to extract key information from invoices (such as the freelancer’s name, date, amount due, and payment method), and automatically route it for approval. The main benefits of bill.com are increased efficiency, less manual data input, and the ability to centralize payment information in one place. Ultimately, freelancers and contractors can get paid via ACH, virtual cards, and international wire transfers.
- Payoneer: One of the greatest advantages of Payoneer is that it will pay your contractors and freelancers in their local currency (it operates in 200 countries and 150 different currencies). This makes it a good choice for companies that work with a globally dispersed non-payroll workforce. If the contractor has a Payoneer account, you can transfer their payment to them directly. If they don’t have an account, Payoneer will send a payment to their bank account via a bank transfer. According to the company’s website, there is a fee of up to 2% when sending payments from your Payoneer balance to bank accounts.
- Wise: Formerly called Transferwise, Wise is an online payment app that allows individuals and businesses to send quick and secure payments. According to its website, businesses can send payments to freelancers in more than 70 countries with better exchange rates than banks and PayPal. Half of all payments sent through the platform arrive within one hour, and recipients don’t need a Wise account to get paid. All payments go directly into their bank account.
- Tipalti: Similar Payoneer and PayPal, Tipalti is a global payable automation solution. However, it can also automate processes within accounts payable (AP), such as onboarding, invoice processing, and reconciliation. Tipalti’s rate vary significantly based on a variety of parameters, so it may be cheaper for some use cases and expensive for others.
- Venmo: Venmo began as a social payment platform in the U.S. and has since added business payment capabilities, such as the ability to receive direct deposit payments from employers. It’s an attractive freelancer payment method because freelancers can quickly and securely receive payments to their Venmo accounts and easily transfer the money to their synced bank accounts. Freelancers can also set up Venmo business profiles, which allow clients to issue payments the same way individual Venmo users pay each other over the app.
3. Freelance management systems (FMS)
A freelance management systems (FMS), like Fiverr Enterprise, utilizes virtually every available payment method to ensure contractors get paid in the way they prefer. Most FMSs fall under the 1099-K definition, so they can handle all tax compliance requirements, such as issuing 1099 forms and collecting W8/9.
You should be aware that there are also freelance services marketplaces that can handle the payment and tax compliance aspect for you, but they charge a marketplace fee of anywhere between 10% to 25% and they’ll be able to only offer a specific level of talents, as top talents do not work with marketplaces.
What are the main contractor payment terms to know?
When you sign an official contract with a freelancer, you should expect to address their payment terms. Freelancers are used to negotiating certain terms, but may be unwilling to budge on others. When you receive an independent contractor’s contract, be sure to share it with your finance team to get their input.
Here are the most common contractor payment terms to know.
- Payment upon delivery: This means the hiring company agrees to pay for the products or services rendered within 24 hours of receiving the invoice. Most companies — especially those that work with numerous vendors — are unwilling or unable to accommodate this request.
- Net 10, 30, and 60: A net payment means that the payment is due within a specified number of days from the date the contractor issued the invoice. Net 10, Net 30, or Net 60 (found on the invoice) simply indicates that the contractor’s payment is due 10, 30, or 60 days from the date of the invoice. This is the most common payment term for independent contractors.
- End of month: This term means the paying company must issue the payment by the end of the month during which they receive the contractor’s invoice.
- Prepayment: Some contractors request a prepayment (such as 50% of the total fee) to be paid before they begin a job. The motivation is to ensure the company won’t “ghost” them, and guarantees they receive a portion of the payment.
To learn more about contractor payment terms, check out this guide.
How should we go about paying international contractors?
When building your freelance talent pool, you have the opportunity to hire premier talent from around the world. But of course, that means figuring out how to pay the contractor, too.
Here’s what you need to know about paying international contractors:
1. Agree on the payment terms and legal jurisdiction
The first step is agreeing on the compensation rate, including whether the freelancer will charge by the hour, according to the deliverable, or a retainer. You will also need to know what currency to pay them in. Then, you need to choose the payment method (such as ACH payments, wire transfers, PayPal, etc.). Make sure you run this by your finance team, as different payment methods come with significantly different rates and conversion fees.
You must also agree on payment terms. Will the freelancer ask for a prepayment? Will they require payments made by EOM? Finally, you should agree on legal jurisdiction. While putting everything in writing can help you avoid conflicts down the road, a legal jurisdiction clause clarifies where litigation would take place if necessary.
2. Ensure tax compliance
It’s the paying company’s responsibility to ensure tax compliance for all of the freelance work they procure. For example, U.S. companies need to collect a W-8BEN Form from all foreign contractors living and performing work outside of the U.S.
Although you are not required to submit 1099-NEC for your foreign freelancers, you are obligated to provide them with the equivalent information information so they can submit the data to the tax authorities in their country. Therefore, you should accurately document all funds paid during the year.
3. Choose the right payment method
As mentioned above, different payment methods come with different costs (to you and to the independent contractor. When determining how to pay freelancers abroad, it’s helpful to know that wire transfers are the most common option for international payments. However, wire transfers can come with hefty conversion rates and transfer fees, depending on the banks.
4. Do a KYC/AML before making your first payment
Doing a Know Your Client (KYC) check before you pay independent contractors is a necessary step when transferring money to individuals to verify their identity before payments. You might find the acronym KYC used indistinguishably with AML, which stands for ‘Anti-Money Laundering’.
For more tips on how to pay international independent contractors, read this post.
The way you pay independent contractors reflects how much you value them
Contractors and freelancers don’t get the benefits and protections that regular employees do. Each payment they earn is essential to their livelihood. Not only are companies contractually required to pay independent contractors according to their agreed upon terms, but they also have a moral obligation to do so.
By taking the effort to prepare your company to pay independent contractors swiftly and in the right method, you will show them that you truly value their work. That’s the key to establishing a great freelancer relationship and keeping it going over the long term.
It’s also integral to making sure you understand your obligations as a company working with freelancers, remain in compliance, and understand the fees and rates of issuing non-employee payments.
See Additional Guides on Key Workforce Management Topics
Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of workforce management.
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